How is income defned?
"hich the elements of the nancial statements are to be recognised recognised and carried in the balance sheet and income statement. +his involves the selection of the particular basis of measurement.
Increases in economic benefts during the accounting period in the form of inows or enhancements o assets or decreases o liabilities that result in increases in equity, other than those relating to contributions from equity participants.
How do we measure income? What are the dierent kinds o income?
!evenue should be measured at the fair value of the consideration received or receivable. 3I*% 5.6. $hen the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, ad8usted by the amount of any cash or cash equivalents transferred.3I*% 5.9
Par 74 denes that income encompasses both revenue and gains: (a !evenue !evenue arises "hen there there are increases in economic benets that arise in the ordinary activities of an entities business. (b #ains represent represent income other than than revenues
If the ino" of cash or cash equivalents is deferred, deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. +his "ould occur, for instance, if the seller is providing interest0free credit to the buyer or is charging a belo"0mar&et rate of interest. Interest must be imputed based on mar&et rates. 3I*% 5.
$hat may be considered ordinary in one entity, may not be in another. Ie. %toc& 'ro&erage rms, Investment Investmen t ompanies. In actual practice, "e determine things as )rdinary, depending on the primary purpose for "hich the business is established, found in the *rticles of Incorporation, or in some cases, the 'I! !egistration.
When do we recognize income?
*n e1change for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. o"ever, e1changes for dissimilar items are regarded as generating revenue. 3I*% 5.9
+he onceptual onceptual rame"or& rame"or& dictates dictates "hat principles should should be met for income to be recogni-ed: (a it is probable probable that any future future economic benet associated "ith the item "ill o" to or from the entity/ (b the item has a cost or value that that can be measured "ith reliability
!evenue recognition is discussed and covered by di;erent I!%.
Income must be either reali-ed, or reali-able.
!eali-ed0 "hen goods or services are e1changed for cash or claims to cash !eali-able 0 "hen assets are received in e1change are readily convertible to &no"n amounts of cash or claims to cash
Income must be measured "ith reliability reliability 2easurement is the process of determining determining the monetary amounts at
I*% 5 covers the %ales of #oods, rendering of services, as "ell as interest, royalties and dividends. I*% onstruction onstruction ontracts I*% 7 6 inancial Instruments I*% 4 *griculture
urther guidance to the revenue recognition is governed by the ollo"ing Interpretations
I!I 5 +ransfers of *ssets from ustomers I!I ? *greements for the onstruction of !eal @state (not yet applicable in the Philippines I!I > ustomer !evenue A 'arter +ransactions Involving *dvertising %ervices
)ur discussion "ill 8ust focus on I*% 5 and I*%
What are types o Sale?
!egular %ales Installment %ales
REVE!E RE"#$%&%# '#R %(S )* (+ %(S )) In general, "e should use the full accrual method of accounting. $hen income recognition principles are met, income should be recorded at once. o"ever, there are instances, (particularly on the installment sales type "hen there is doubt on the collection of the sales price, over the long run. In such cases, to apply reasonable conservatism, "e have to depart from the full accrual method and recogni-e revenues during in relation to the +ime of ollection (to di;erentiate refer to Problem I on page 9B6. o"ever, I!% has a "ea&ness, and that is to provide e1act guidelines for the grey areas in accounting recognition. or such cases, 8udgment needs to be applied, and the rationale should be adequately disclosed in the nancial statements of the company. Cnli&e the I!%, C% #**P provides for a clearer accounting treatment. +hey include the follo"ing revenue recognition:
ost recovery (#ross Prot is deferred (=#P0
What are the common ,uestions in -ro.lem Sol/ing? . 9. >. 4. ?. B.
!eali-ed #ross Prot A urrent Fear +otal !eali-ed #ross Prot !eali-ed #ross Prot A +o date =eferred #ross Prot, @nding =eferred #ross Prot, 'eginning Installment *ccounts !eceivable, @nding 7. Installment %ales for the Fear 5. ash ollections for the Fear 6. ash collections year to date G.#ain H
How do we determine the air /alue at date o Repossession? $e follo" P*% 9, since it "ill become part of our Inventory. or listed prices (there is an e1isting published ratesHprices, valued at @stimated %elling Price less costs to sell, "hich include reconditioning costs and other costs related to resale . or unlisted prices, should be reduced further by ormal #ross Prot. (Problem EI Page 97G &rade0%ns 2erchandise are recorded at the !E. )ver or underallo"ances are increases and decreases to the Installment %ales balance. Problem EII 97G
